David R. Henderson  

Bet on Euro: I Won

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Back in October 2011, I had a bet on the Euro with Iain Murray of the Competitive Enterprise Institute. To recall, he bet that by the end of March 2013, Spain, Italy, and Greece would have left the Euro. I found his reasoning sound but his timing off.

First, his reasoning, or, more exactly, my reasoning about why his thinking made sense. An economics literature beginning in about the 1960s found that there was a case for what economists call an "optimal currency area." Here's the Concise Encyclopedia article on that subject, written by Paul Bergin. Two key paragraphs:

Much of the theory of optimal currency areas is illustrated by the institutions of the U.S. economy, which might be viewed a type of monetary union in which fifty states have agreed to share a common currency. Although the severity of recessions in the United States can vary by region, there is significant labor mobility, with around 3 percent of the U.S. population moving from one state to another annually. Further, the federal fiscal system permits compensation across state lines. Economists have estimated that for every dollar lost in one region relative to another in a recent recession, up to thirty-five cents were transferred to the losing region from the rest of the country, in terms of lower income taxes paid to the federal government and extra unemployment benefits received.

By contrast, there is relatively little labor mobility between European countries. Only about 1 percent of Germans and Italians relocate annually between regions within their own countries, and even fewer move between the two countries. As yet, most taxes and fiscal expenditures are conducted at the national level, and so there is limited opportunity for cross-country compensation. Further, European countries have more distinct business cycles than those observed between U.S. regions.


This gets at why I thought the Euro never made much sense. I'm guessing that Iain Murray's reasoning was similar.

For that reason, I would not be surprised if any of these countries were to leave the Euro but I thought that Iain was assuming it would happen way sooner than it did. As I noted in my post announcing this bet:

I remember Milton Friedman saying that when he looked back at his predictions, he had almost always been right about the direction and almost always wrong about the timing. He had always predicted that changes would happen more quickly than they did. That's what I think Iain did. It's what I did back in 2001 when I bet an official from Austria's central bank that at least one country would have left the Euro by 2006.

Iain Murray, an honorable man, paid up, and told me had no problem with my announcing the outcome.



COMMENTS (5 to date)
Tom West writes:

I wonder whether the short wisdom is "monetary unions should probably not cross language boundaries".

I dearly love the idea of the Euro and its theoretical unifying results, but I'm not at all certain that the reality doesn't firmly rest in the pessimists camp.

Pedro Albuquerque writes:

You mean "not cross language boundaries" such as in the case of Switzerland's four official languages? Let's see how unsuccessful is their multilingual monetary union:
Title: Switzerland / U.S. Foreign Exchange Rate
Series ID: EXSZUS
Source: Board of Governors of the Federal Reserve System
DATE..........VALUE
1971-01-01 4.3053
2013-03-01 0.9466

Mark A. Sadowski writes:

"Although the severity of recessions in the United States can vary by region, there is significant labor mobility, with around 3 percent of the U.S. population moving from one state to another annually...By contrast, there is relatively little labor mobility between European countries. Only about 1 percent of Germans and Italians relocate annually between regions within their own countries, and even fewer move between the two countries."

Actually given the mass movements of working age populations in or out of Ireland, Latvia (although technically not a eurozone country, it is pegged to the euro) and Spain over the last decade, labor mobility is very low on my list of problems that the eurozone is facing.

True the gross migration rate by EU-27 members into eurozone member states averaged only 4.40 (per 1000) during 2002-2011 in contrast to the gross state-to-state migration rate of 20.48 in the US over the same period. But there is foreign migration to compensate and, more importantly, the proper measure for migration as a labor market adjustment mechanism is *net migration*. When these two factors are taken into account, the net migration rate (the weighted average of the absolute values) over 2002-2011 are 4.06 and 4.90 for the eurozone and the US respectively. And when one re-averages the eurozone over the 63 NUTS 1 regions, to make the divisions in population more similar, the net migration rate rises to 4.35.

So by this measure population migration in the eurozone is almost the same as in the US. Moreover gross migration rates of working age adults suggest that the net migration rate of working age adults in the eurozone relative to the US may be higher still.

Of course it wasn't always this way. According to Ivo Maes (1992) the net migration rate in 1980-85 (prior to the Schengen Agreement) in the EC and the US was about 2 and 7 respectively.

Tom West writes:

Well, that's a pretty strong counter-example.

Is there much labor mobility between the the different linguistic divisions in Switzerland, or do they have some other way of equalizing the different sections?

TomGrey writes:

I predict that Germany will leave the Euro.
There's no way for Germany to kick others out; and there's no way for others to stop Germany from leaving; and it's not sustainable for Germany to remain with all the others.

There is a new report about how Net Worth poor Germans are, with little home ownership, relative to the other Euro countries -- even poorer than poorest Slovakia (where most of us do own our houses/ flats, due to house privatization after The Wall fell).

As only the German economy is rich enough to pay for the excess debt of the other Euro countries, for the Euro zone to continue, the Germans will have to pay. Which they'll keep doing until they stop; they'll stop when a political party in Germany calls for a German exit / return to the Deutschmark.

Such a party is forming. I guess within 2 years but would only bet on less than 5.

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